Dividends to preferred stockholders are deducted from net income when calculating the return on common stockholders' equity ratio because
A)dividends are not an expense on the income statement.
B)the ratio is an indicator of the return on "common" stockholders' equity,not the return on preferred stock.
C)dividends are only available for distribution to common stockholders.
D)conservatism indicates that shareholders prefer a smaller numerator.

Question

Quizplus · Accepted Answer

The return on common stockholders' equity ratio is specifically meant to measure the return on investment for common stockholders. Preferred stockholders have a different level of priority for receiving dividends, and their dividends should not be included in the calculation of this ratio. Therefore, dividends to preferred stockholders are deducted from net income when calculating this ratio, so that the resulting value reflects the return on investment for common stockholders only.

Dividends to Preferred Stockholders Are Deducted from Net Income When